A ‚Ä¶ study, by the Oxford University Centre for Business Taxation, says tax losses from multinationals shifting profits that are down to faulty transfer pricing have been "overestimated drastically".

It’s clear that the FT knew of this before the report was published so either the Oxford University authors or DfID drew this to their attention. It was a message someone wanted to get across. So I went to find support for their claim.

This is to be found in this text:

A key shortcoming of many existing studies based on mispricing is that they only take into account overpriced imports into developing countries and underpriced exports of these countries. But the mispricing approach also identifies underpriced imports into developing countries and overpriced exports. Both shift income into developing countries. Estimates of tax revenue calculations have to take into account income shifting in both directions. If only one direction is taken into account, the results are highly misleading. In this case, tax revenue losses due to mispricing are overestimated drastically.

This may be true: I leave it to the authors of these reports to comment. But that’s not the point. It is possible to say that this omission leads to the risk that the net estimates are overstated, if the claim made by the Oxford authors is true: that I agree. But is it possible to say, as they do, with apparent objective certainty, that the “tax revenue losses due to mispricing are overestimated drastically”?

For that to be a plausible conclusion without having done research on the mass of data used to reach the conclusions my friends and colleagues have come to in the work they have done there would have to be a body of evidence suggesting that:

There is prima facie evidence that people want to shift money into developing countries through illicit financial flows based on transfer mispricing;

That there is evidence of them actually doing this;

That there is documented evidence of profits being overstated in these places as a consequence.

Anyone familiar with the literature on illicit financial flows knows there is no such prima facie evidence: I have seen none at all. I have never heard of people redirecting financial flows and profits to such places. I have never seen a tax agreement that considers the possibility. I have never heard of capital flight of any sort into such places. There is little evidence of profits being reported in developing countries. I have of course heard of remittances through informal channels: that we know of, but these are not corporate transfer mispricing.

So you have to ask, why should we expect anyone to test a hypothesis when there is no evidence that the phenomena exists? And secondly, how can anyone come to a categorical conclusion that such flows are so substantial and significant that they nullify the evidence of massive flows in the opposite direction when no evidence is put forward by them to support that hypothesis? Given that is the case I have to ask whether the Oxford paper qualifies as objective academic observation.

And there is another issue that the claim ignores, which is the fact that even if there was transfer pricing abuse into developing countries this would not in any way reduce the abuse that has been found that imposes such substantial cost on them. The transfers in would not match the transfers out. They would (if they occurred, which I doubt) be on different commodities and be by different companies because no one is going to do dual transfer pricing abuse in and out to arrive at a net correct position. So in fact the gains would be entirely unrelated to the losses, could not be netted off and would be a massive transfer pricing loss to developed countries; somthing we contend occurs but which has as its destination the, for multinational corporations, more attractive destination of a tax haven / secrecy jurisdiction. As such the inherent logic of netting off in the Oxford paper is fundamentally flawed whichever hypothesis is right. The reaklity is that the loss calcualtions stand up to scrutiny, it is the critique that fails.

In that case doesn't it follow that the claim it makes that “tax revenue losses are overestimated drastically” is actually just “wildly exaggerated” or simply "plain wrong"?

Whichever is true one thing is certain: the Oxford paper is unambiguously flawed, without foundation and lacks any element of objective credibility when such extraordinary and categoric claims can be made in the absence of presentation of any evidence to support them.

4 Responses

I think you reach here to the very heart of the misery of academic economics as it is practised widely in these days: generating and chosing irrelevant hypotheses for testing in order to increase meaningless “knowledge” about things that don’t matter. It pays off in academic and private sector repute because it has been undertaken without duely critizising and laying bare the sources’ poor quality or outright unavailability of data (and thus the limits of one’s own research), and instead followed meticulously the trodden methodological paths of peer economists who cheer up at the frequency of mass-placing the resulting PR-polished, spot- and meaningless articles in “peer-reviewed” journals…

I’m not regarding you as an economist for the purposes of what follows‚Ä¶‚Ä¶‚Ä¶‚Ä¶..

The teenage scribblers that used to write on economics in the 90s have grown up to become middle-aged scribblers. I’m afraid to say that my view (based on economics reports I have reviewed in the course of my work) of many practitioners of the dismal science is that they tend to produce dismal conclusions, based on dismally extracted data and dismal assumptions.

I use “dismal” here in the sense of third-rate (what I really mean is piss-poor), not dismal as gloomy as originally meant.

There was a lot of work done on transfer pricing in the 1970s and 80s—Sidney Dell even ran a specialised UN agency addressing this issue. The TNI people in Amsterdam should have sheaves of documentation; ODI in London used to work on this (although they may no longer do so). Or again, Valpy Titzgerald at Oxford has worked on this, and you might ask him to comment briefly.